Can Citigroup Cuts Cure?

For Investors, Best Move
May Be to Wait and See;
Prince's Big Challenge

Investors who want to parlay
Citigroup Inc.'s
C -0.59%
long-awaited restructuring into profits might be better off on the sidelines this week when the banking behemoth announces thousands of job cuts and other spending crackdowns.

That is because the plan, likely to be announced Wednesday by Chairman and Chief Executive Charles Prince, won't shed much light on the bank's fortunes as it grapples with a slew of tough issues weighing on financial institutions around the country.

After several blockbuster years, bank earnings now are being squeezed by weakening credit quality and an interest-rate environment that makes long-term lending less profitable. Big banks like Citigroup typically fare better than regional firms in this environment because they have a broader line up of businesses, but they aren't immune to feeling the pinch.

Indeed, Citigroup has been hurt more than some of its big-bank brethren, particularly in its U.S. consumer operations, which represent 35% of the company's annual $89.6 billion of revenue and includes retail branches, credit cards and lending to individuals.

But investors won't get a sense of how Citigroup is handling these issues for another week. The bank is slated to report first-quarter earnings April 16.

So far, investors have given a lukewarm response to expectations that Citigroup is preparing to slash more than 15,000 jobs, or about 5%, from its employee ranks that now total 327,000. The plan is necessary, they say, but represents just one step toward the company's goal to generate bigger profits by becoming leaner and more efficient. Wall Street analysts expect the cost-cutting moves to generate at least $2 billion in savings that will be plowed back into the bank's operations.

In a report issued Thursday, Lehman Brothers analyst Jason Goldberg pegged Citigroup's revenue per employee at $270,000 compared with $362,000 at its banking peers. To match its peers on that metric, Citigroup would have to cut 80,000 jobs, estimated Mr. Goldberg, who has a "buy" rating on the stock. Lehman has done business with Citigroup in the past year.

"While we don't expect it to go that far, we do believe cuts could run deeper than expectations," he wrote.

Citigroup shares have been essentially flat following a March 26 report in The Wall Street Journal that said executives were putting the final touches on the restructuring plan, which would likely result in a charge against earnings of more than $1 billion. On Thursday, shares of Citigroup rose 21 cents to $51.57 in 4 p.m. composite trading on the New York Stock Exchange. The stock market was closed Friday in observance of Good Friday.

Citigroup's shares trade at 11 times estimated per-share earnings for 2007, compared with a price-earnings ratio of 12 for
J.P. Morgan Chase
JPM -0.47%
& Co. and 10 for
Bank of America Corp.
Citigroup's share price is up almost 8% over the past year, while J.P. Morgan's stock is up 15% and Bank of America's is up 9% over the same period.

"I would much rather see revenue growth than cost-cutting, but if the revenue growth isn't showing up, they need to cut the costs," says Robert Maneri, a portfolio manager at Victory Capital Management Inc., which owned 10.3 million Citigroup shares as of Dec. 31. The firm, which is based in Cleveland and has $36 billion in assets, is a unit of
KeyCorp.

It has been months since investors began pressuring Citigroup to stem a run-up in expenses that rose 15% in 2006, more than double the bank's 7% increase in revenue. The results have caused dissension among investors, some of whom are calling for a break-up of the financial-services company, which has a market value of more than $255 billion.

Mr. Prince is vowing to keep Citigroup together, but has pledged to inject a new sense of discipline at the bank. In December, he promoted Citigroup veteran Robert Druskin to chief operating officer. As part of that job, Mr. Druskin was assigned to launch a comprehensive review of the bank's vast operations and focus on identifying "structural" savings opportunities.

The new focus on expenses received another shot in the arm last month, when Citigroup named Gary Crittenden as chief financial officer. Mr. Crittenden, formerly CFO at
American Express Co.
, is expected to work closely with Mr. Druskin.

The prospect of a significant cost-cutting plan was enough to prompt John McDonald, an analyst at Bank of America, to upgrade the stock late last month to a "buy" rating from "hold."

"We believe that years of disappointing fundamental and stock price performance have set the bar low for Citi shares, such that even modest improvement in management execution and financial results could be positive catalysts for the stock," he wrote.

Mr. Prince has been increasingly expressing frustration with the bank's multiple layers of management. "We don't need four or five layers of headquarters activities in the corporate investment-banking business," he said at a conference hosted by Citigroup in January. "So that means vacuuming out the upper levels, getting it pushed closer and closer...to the closest level you can get for the people who are dealing face-to-face with the client."

The overhaul is expected to address many of those redundancies, particularly among "back-office" operations within the bank's operating units. Other jobs are expected to be moved to lower-cost locations.

"It has taken major shareholders to get upset about it for that to happen and that's disappointing," said Steven Scruggs, director of research at Bragg Financial Advisors Inc. in Charlotte, N.C., which manages $170 million and owned 46,000 shares of Citigroup as of Dec. 31.